Why One Outsourcing Provider Is Not Enough

An outsourcing strategy is a lot like a personal finance portfolio. You should diversify to manage risk.

The outsourcing model that has worked for your company over the past five years is probably not as effective as it could be. Today, with more options to choose from, companies need to consider how outsourcing, offshoring, nearshoring, onshoring, and insourcing all play together in the right mix to get maximum value.

We are also at a point where outsourcing to one or two big providers does not make sense, because companies lose the ability to take advantage of best-of-breed providers that are out there.

At Mindtree, we are seeing more and more large contracts being broken up into smaller pieces. One reason is that there's risk in placing large deals with one provider. Another reason is to allow best-of-breed providers to participate. This movement towards best-of-breed outsourcing models puts a lot of pressure on vendor management organizations (VMOs), because it means the VMO must be intimately aware of the many diverse companies in the market and it must come up with a governance model to manage them. This is not easy, but the payoff for getting this right is too large to ignore.

At its most simple, the outsourcing market can be categorized as follows:

Offshore -- If cost reduction and scale are the main drivers, there is no better place to find talent than India. India remains the most sought after location for the outsourcing of applications or projects where the main business goals are cost reduction and scale.

Nearshore -- Whether this is Eastern Europe for Western European companies or Canada or LATAM for US companies, nearshore is appealing for certain projects where closer proximity is required. But most companies view their nearshore partners as working in those local regions only. For example, a nearshore partner in Mexico or Brazil would be there only to support the business in that region.

Onshore -- More companies are seeking onshore options for projects requiring ongoing dialogue and communication with users and for projects delivered through Agile methodologies. In addition to Agile, we are seeing an increased need for testing and business intelligence projects to be delivered in onshore centers, because key components of these projects require constant interaction.

Insourcing -- The consensus here is that some companies have outsourced too much and are now moving to bring certain projects back in-house. It is critical for companies to retain core competencies in areas like architecture, business analysis, program management, and subject matter expertise. It is also important that your outsourcing partners are able to work well with the insourced teams.

The best outsourcing model can also help companies align with partners who really excel in certain areas. Forward-thinking outsourcing strategies are typically based on a multi-vendor model where each vendor gets used for its given area of strength. When companies create "towers" across their business needs, it then becomes easier to select a partner with the best credentials.

In most cases, this will lead to a matrix model that clearly maps out both functional and technology needs. Examples of towers are e-commerce (digital), supply chain, testing, mobility, information management (data), agile development, legacy application maintenance and support, and infrastructure.

When companies see their IT landscape in terms of towers it becomes clear that a multi-vendor model is required and that best-of-breed partners should be selected. This is because no one vendor can be good at everything. Size is also a factor. The best outsourcing strategy includes partners of all sizes -- large, mid-size, and specialty boutiques.

There is a parallel between an outsourcing strategy and a personal-finance portfolio in that you want a combination of diversity, risk-mitigation, and a track record of performance. It is a huge risk to park all of your money in a single fund. The same is true for outsourcing. In addition to aligning partners by their sweet spots, a healthy outsourcing portfolio will include partners who are the best in offshore, nearshore, onshore, and local development. Typically this will mean companies need to tie up with large, mid-size, and boutique partners around the globe.

Again, this is a big challenge for the VMO team, but when done right, companies will see cost reductions, faster time-to-market of applications and products, and higher customer satisfaction. The best-of-breed outsourcing model is the path to get you there.

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I think J_Brandt and Tom Murphy make great points. I also feel that the matter of outsourcing will hedge upon the needs of the organization and project interaction. I can't imagine a non technical person managing a project with more than one outsourcing provider.. This is where managing the issue of "complexity" as Shane mentioned comes into play.

Ideal situation: You have a Personnel in place who will be somewhat of a manager or consultant and contract out to one main Lead Outsourcing Provider who may subcontract certain areas of the project to another provider. Maybe that's just wishful thinking.

I don't think Mr. Staples' position [as Co-Founder and President of Mindtree] or association is a conflict of interest at all. I have no association with Mr. Staples and I found the commentary to be informative. I am a supporter of Domestic (Onshore) sourcing and Rural Sourcing, but I must admit that "Outsourcing" to India and Mexico in regards to IT Services and Web Develpment are cost effective and project effecient. We live in a Global Economy and if you are going to be a viable entity of any sort, yu must think Global. Regardless of your IT or Business decision, you must think of the best way to manage resources and deploy technology both effectively and efficiently.

Overall I applaud Mr Staples and I think everyone must agree that "companies need to consider how outsourcing, offshoring, nearshoring, onshoring, and insourcing all play together in the right mix to get maximum value."

The Information Week IT outsourcing commentary listed above by author Scott Staples does not disclose he is the President of Americas for Mindtree – a large IT offshore outsourcing company based in Bangalore, India.

What is Staples trying to do by authoring that Commentary and not disclose his personal financial bias in favor of IT outsourcing?

However, Staples does show ethical concerns regarding why he has not disclosed his probable "conflict of interest" issues.

Staples stands to benefit financially if his Mindtree company branch gains any business from his pro-outsourcing Commentary.

Here is his undisclosed self-bio found through website links:

Scott Staples is the Co-founder and President, Americas at Mindtree. Scott brings over 24 years of experience in IT consulting and client management. As President, Americas, Scott leads the strategic transformation of Mindtree as a global service provider.

That's a great point. At GM, when it went to multi-vendor strategy, it tried to enforce certain processes among those vendors for doing 40-some IT tasks -- so it was done the GM way, not the HP, IBM, Wipro, etc. way. That's a complicated endeavor, and one that's probably impossible unless you're an outsourcing customer like GM with something like $3 billion a year in outsourcing spending to entice the vendors.

Nearly every IT staff wants to avoid too much dependence on a single vendor. And nearly every staff knows that multiple suppliers come with a learning curve, data integration and complexity price tag attached, however strong the logic. Do those "towers" look anything like silos?

General Motors was the biggest example of a company going with a single outsourcer, relying on EDS for 10 years almost exclusively as part of the deal to divest EDS. But its CIO, Ralph Szygenda, sprinted to a multi-vendor approach as soon as he was able, in large part to gain better negotiating leverage. A number of companies who tried "one throat to choke" outsourcing deals in the mid 2000s unwound them. But some companies, like P&G with HP, seem to remain comfortable putting a majority of their IT operations with one big vendor.

Jeff, Shane: Funny, I had the opposite impression. I thought the benefits of risk mitigation were so obvious that spreading your sourcing around was a no-brainer. Imagine any of these scenarios:

a. A manufacturer it completely dependent on one source for, say, memory in a new smartphone. And the supplier is hit by a devastating monsoon that shuts down production for six weeks. Too late to scramble for alternate suppliers, but if you have one or more in place, you can see if each can ramp up production to offset the shortage.

b. All your phones are manufactured in one fatory in China -- and it is destroyed by a fire. If you haven't got another supplier set up, tough luck.

c. You have all your defense companies records secured in your ultra secure datacenter. One day, you arrive to find foreign-government hackers have destroed valuable records. Got a copy stored in the cloud?

I might agree with this more if what you are outsourcing is purely personnel needs. But even then, the complexities of managing multiple organizations may quickly chew up any savings you get. I think it comes down to the actual personnel needs or project interactions.

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